Carbon Tax Time in Canada

Holy Loonie Toonie! It was clear that incumbent Canadian Prime Minister Stephen Harper was very nervous heading into yesterday's election, going so far as to enlist the help of Doug Ford, the brother of famously inebriate Toronto Mayor Rob Ford, and not exactly a teetotaler himself. The smart money was that a plurality would emerge from yesterday's federal election and the best bet, far from a sure bet, was that the Liberal Party would wind up holding the most seats. But Canadian voters stunned everybody by handing Justin Trudeau and the Liberal Party 184 seats out of 338, for a majority. This is parliamentary democracy, where caucus members toe the party line reliably. As leader of a majority party, Trudeau does not have to negotiate with Harper and the Conservatives, nor Thomas Mulcair and the NDP. Justin Trudeau has control over Canadian government policy.

Trudeau has clearly signaled a concern with climate change. Here is the first order of business for the Prime Minster-elect: enact a carbon tax. Do it in a way that will outflank the NDP and permanently put to rest their cap-and-trade dalliance: by enacting a carbon fee-and-dividend, collecting all revenues into a dedicated trust fund, and distribute every single tax dollar collected to Canadian households, on a per-person basis. This is the proposal championed by Citizens Climate Lobby Canada, and its sister American organization Citizens Climate Lobby.

A carbon fee-and-dividend makes economic sense for the United States, but the political prospects for enactment in Canada are far brighter. Not that Americans should give up on  carbon fee-and-dividend, but this moment in history is perfect for Canadian adoption. Here is why:

Canadians are ready for a carbon tax. Canadians have tired of being an international laggard on the climate change, and have expressed a clear desire for something on climate policy. But what policy? Apart from a basic suspicion of the NDP leadership's maturity levels, Canadian voters have questions about the cap-and-trade that Mulcair championed, especially after Alberta Premier Rachel Notley rejected it. How about just regulating greenhouse gases as a toxic substance under the Canadian Environmental Protection Act? That is plausible, and was the predicate for two past federal initiatives: the failed rolling-cap-and-trade scheme proposed by the previous Prime Minister, Paul Martin, and Harper's 2011 plan to phase out coal-fired generation in Canada over the next forty years. But how does Environmental Canada (the weak Canadian version of the U.S. Environmental Protection Agency) set a standard for greenhouse gas emitters in Canada? It had to lean heavily on the U.S. Environmental Protection Agency just to help establish the coal-fired generation phaseout, so my guess is that Environment Canada simply does not have the institutional capacity to figure out how to set standards for cement plants, refineries, steel mills, and pulp and paper mills. So what's left? Well, the Canada Revenue Agency is pretty good at what it does, and collecting a carbon tax is comfortably within its wheelhouse. Add to that the political dynamic that oil sands executives past and present favor a carbon tax, and it is starting to look like a political no-brainer.

Canadians are ready for at least a small wealth redistribution. No study of carbon fee-and-dividend has been done for Canada, but the results would be similar to that of the United States: that a carbon fee-and-dividend would effectuate a modest wealth redistribution from rich to poor. Not that we are talking about fleecing the rich. If the $30 per ton CO2 tax in effect in British Columbia were to apply nationally, emissions (576 Mt in 2013) would likely decrease by about 7% in response to what would be an 7% increase in fossil fuel price (a -1 elasticity), resulting in emissions of about 535 Mt of CO2, producing revenues of about $16 billion Cdn. Spread out over the 35.8 million Canadians, that would be about $450 for every man, woman, and child, or an average of $1,800 for a household of four. We know that wealthy Canadians consume more, poor Canadians less, so a lump-sum rebate, or "dividend," would wind up giving the poor back a little more than they pay out, the wealthy not so much. But the difference is small, a transfer payment from a rich family to a poor family on the order of a couple of hundred dollars. Still, in a political reality in which the poor are globally clamoring for greater equality, this is in the right direction, and really not much to complain about if you're a wealthy Canadian. Certainly wealthy British Columbians have moved on to more important things, like hockey.

Canadians will want some simple, clean, and straightforward. There is something small, simple and straightforward about a carbon fee-and-dividend. Dollars go into a trust fund, not unlike sovereign wealth funds like Alberta's Heritage Savings Trust Fund or Alaska's Permanent Fund, only the incoming dollars would go right back out, instead of invested. The amount of money for some industries would be large -- cement and coal-fired power plants -- but for most Canadian households, it would be a mostly manageable adjustment. Unlike the British Columbia carbon tax, the dividend would make net winners out of the poorest Canadians. Could political shenanigans hijack some of those carbon tax proceeds? Of course, that is always possible. But Justin Trudeau has a majority, and he doesn't have to deal with the opposition, the way that Democrats would have to work with Republicans in the U.S. Justin's in control. The only question is whether Canadians would punish the young Prime Minister for this. If he proceeds deliberately and with notice -- something Gordon Campbell did not do in British Columbia -- he will not be politically punished, but rewarded.

A carbon fee-and-dividend is small, self-contained, costs rich Canadian households a couple of hundred dollars a year, benefits poor Canadian households by a few hundred dollars a year, and reduces emissions. You want to mess with that? Step right up and announce your opposition to a small wealth redistribution or to climate policy.

Is Alberta Inching Toward a Provincial Carbon Tax?

The third significant climate change-newsworthy event of last Thursday (in addition to the Pope's address to Congress and President Xi Jinping's announcement that China would institute a cap-and-trade program) was an address by Alberta Premier Rachel Notley to the Montreal Chamber of Commerce, in which she clearly balked at toeing the federal party line on climate change: Thomas Mulcair's call for a national cap-and-trade system. "A national cap-and-trade program may not be our best road forward." Canadians are polite; that was was a rejection. Give 'em hell, Rachel!

I may turn out to be a fool, but I find myself wondering what Alberta, as a province could do, other than a real, British Columbia-style, old fashioned carbon tax. Former Canadian oil executive Dennis McConaghy blogged a month ago that Canadian oil producers should embrace a carbon tax. Privately, Alberta oil executives have long been open to a carbon tax. The late Rick Hyndman, the widely respected senior economist for the Canadian Association of Petroleum Producers, espoused a carbon tax. Rick even quietly worked for Liberal Prime Minister Paul Martin, designing an ultimately ill-fated convoluted cap-and-trade scheme with a price floor and a price ceiling. Hmm, a cap-and-trade with a price floor and a price ceiling ... is that a carbon tax? Rick only smiled when I asked him that question.

We know that a carbon tax would win political points from economists. We know from the British Columbia experience that a carbon tax would win political points from environmentalists. If the Alberta oil industry is aboard (it is), who's left? It is ironic that people have always thought a carbon tax was a political non-starter. In Alberta, it really seems as if there is no place left to go.